UK: Insurance Regulation

Under the Financial Services and Markets Act 2000 (FSMA), the activities of ‘effecting’ and ‘carrying out’ contracts of insurance as a principal in the UK by way of business are regulated activities. These activities include the underwriting of insurance and the payment of claims. It is a criminal offence to carry on those activities without authorisation from the Financial Services Authority, subject to certain exemptions and exclusions. Unauthorised insurance contracts are also, generally, unenforceable by the ‘insurer’.

What constitutes a ‘contract of insurance’ is not defined by statute and it is necessary to look to the common law. The FSA has recently issued guidance on this issue, but the guidance merely analyses the common law position. Broadly, a contract of insurance may be defined as an arrangement whereby one party (the ‘insurer’) will pay money to, or confer some other benefit on, another (the ‘insured’) on the occurrence of an uncertain event, in return for the payment of a consideration (usually referred to as a ‘premium’). It involves the transfer of risk from the insured to the insurer.

It is worth noting that it is possible for parties to be involved in commercial arrangements (e.g. in relation to extended warranties or guarantees) which, inadvertently, constitute insurance business. It is therefore essential to scrutinise any arrangements which appear to bear the characteristics set out above to make sure they do not actually constitute unauthorised insurance business.

Where the FSA grants authorisation to a company (an ‘authorised person’) to carry on insurance business, it will specify the classes of business which may be carried on by the company e.g. accident, damage to property, motor vehicle liability, credit.

The FSA's supervision of insurers has, historically, been largely ‘prudential’; that is, concerned with ensuring the financial soundness of insurers rather than with imposing standards in relation to the way products are sold or the insurers' dealings with customers. That has now changed. Following the implementation by the UK government of the European ‘Insurance Mediation Directive’ which required member states to regulate insurance sales, the FSA is now (from 14 January 2005) also the statutory regulator in relation to that aspect of insurers' activities. It has imposed rules on the way insurers sell insurance policies and deal with customers: see further under ‘Intermediaries’ below. It should be noted that certain (but not all) extended warranty and travel insurance products are excluded from the new regime in relation to sales, though not in relation to underwriting, which still requires FSA authorisation.

The FSA has considerable powers of investigation and discipline over authorised persons. It also operates the ‘approved persons’ regime, whereby individuals appointed by an authorised person to carry out certain specified functions must be approved, in advance of taking up those functions, by the FSA. Approved persons are required to subscribe to a number of standards, breach of which exposes them to discipline by the FSA in a personal capacity.

Since 14 January, insurance intermediaries have been subject to regulation by the FSA for the first time (whether acting as traditional insurance brokers on behalf of insured parties, or selling policies, handling claims or carrying out other functions on behalf of insurers).

The activities of most intermediaries are therefore subject to FSA rules covering all aspects of their business, unless another regulated entity is prepared to register them as an ‘appointed representative’ and thereby accept regulatory responsibility to the FSA for their activities. It is a criminal offence to carry on the activities of an insurance intermediary without FSA authorisation, appointed representative status or the benefit of another exemption.

1. Dealing in contracts of insurance as agent. This activity is defined in terms, of buying, selling, subscribing for or underwriting contracts as agent, whether for insured or insurer;
2. Arranging (bringing about) deals in contracts of insurance;
3. Making arrangements with a view to transactions in contracts of insurance. Note that this activity is wide enough to encompass the activities of most ‘introducers’;
4. Assisting in the administration and performance of a contract of insurance. This activity relates, in broad terms, to activities carried on by intermediaries after the conclusion of a contract of insurance, for and on behalf of policyholders, in particular in the event of a claim. For example, loss assessors acting on behalf of policyholders are likely to be carrying on this activity;
5. Advising on contracts of insurance; and
6. Agreeing to carry on any of the above activities. This activity concerns the entering into of a legally binding agreement to provide the services to which the agreement relates.

Various exclusions apply and certain types of person are exempt from the requirement for authorisation. However, the new regulated activities are such as to encompass the activities of many businesses and other entities whose activities do not primarily relate to insurance. For example, retailers, charities, property managers and other professionals may all be caught if they are involved in introducing customers to insurance providers, or are otherwise involved in the promotion or arranging of insurance. Even intra-group arrangements may be caught in some circumstances. FSA research shows that recognition of this issue continues to be far from universal among the ‘secondary’ insurance market. It is quite possible to be involved in regulated activities without realising it.

If they are carrying on the regulated activities, intermediaries are subject to the new FSA rules about the way they deal with customers. These rules apply equally to insurers in so far as they are carrying on the customerfacing activities. For example, there are rules as to status disclosure by the intermediary, product disclosure, the handling of client money and claims handling and in certain circumstances the customer is given a right to cancel policies after purchase.

Participants in the Lloyd's insurance market are in a special position. Historically, Lloyd's regulated its own participants and although that has in large part changed, it retains some residual regulatory functions in tandem with the FSA.

Lloyd's members (Names) are not subject to the requirement for authorisation for their underwriting activities. The managing agents who underwrite risks on their behalf are, however, subject to a requirement for FSA authorisation for their own activities, as are the members' agents who advise Names on their syndicate involvement.

Managing agents are, since 14 January 2005, subject to the new FSA rules on insurance sales.

Insurance brokers who wish to place business at Lloyd's are required to be accredited by Lloyd's. In order to gain accreditation, Lloyd's brokers are required to satisfy certain additional qualifications as well as obtain FSA authorisation as intermediaries.

This article is an update on our original insurance regulation briefing note issued in September 2004. For further details please contact our Insurance Regulatory team.